While many businesses are the result of one or several individuals setting out to create a new product or service, others happen when more sophisticated business owners or entities join together in an effort to explore new options or avenues for growth. Sometimes this results in the formation of a new partnership or corporation. Other times, it leads to the creation of a joint venture. This business form is established when two or more existing entities agree to pool resources or efforts in order to explore new business opportunities or to reach a mutually agreed upon goal. Most often, joint ventures are temporary business formation structures that eventually lead to dissolution of the joint venture after its goal is reached, or progression to the formation of a more permanent business entity.
Establishing a Joint Venture
Joint venture are not required to file formal paperwork or documentation of status with state or federal governments. Instead, development of a joint venture is contractual and involves one business entity entering into a contract with another entity. This contract will typically describe the purpose and nature of the joint venture, its goals, and the responsibilities of both partners. For instance, two businesses selling similar goods may partner together in a joint venture in order to try to break into a new market. While many businesses partake in the joint venture in their original capacities, it is also possible to establish a joint venture by creating an independent third company that will manage the business of the joint venture. Thus, in the above example, the two sellers may create a new corporation or partnership that will handle marketing and distribution in the new and emerging market they are entering. While joint ventures are typically differentiated from other business structures because they are of a more limited duration, the creation of a jointly owned third company can be a means of transitioning a temporary endeavor into a more permanent enterprise.
In either situation, since joint ventures are governed by contract, it is extremely important to carefully review any contractual documents that discuss the scope and responsibilities of the joint venture. Typically, parties entering into a joint venture will be asked to contribute time, skills, or financial resources toward the success of the venture, and this must be carefully spelled out within the contract. Likewise, it is important to carefully delineate how the joint venture can or should be terminated in the event that it reaches a conclusion or is unsuccessful, so that both parties are on the same page concerning such important matters.
Weighing the Benefits of a Joint Venture
Joint ventures are often an excellent avenue for existing businesses and business owners to move into new areas of specialization or expertise, or new markets, by allowing them to partner with other corporations for a limited period of time. Often, these types of partnerships will allow both members to contribute fewer resources and have less exposure to risk, while creating greater profit, than each would have had had it expanded its business alone. A joint venture may also allow a business to accomplish more than its limited financial resources would otherwise have allowed. However, joint ventures also mean exposing your business and your financial assets to the decisions and management of another company, which requires careful consideration and due diligence. Entering into a joint venture contract is not a decision to be taken lightly, since it can mean relinquishing a degree of control to another individual or entity.